How Germany achieved stable & affordable housing

A few months ago, after posting numerous articles advocating the Texan approach to land-use planning,  I promised fellow MacroBusiness blogger, The Prince, that I would undertake an analysis of the German housing system, which is regarded as amongst the most affordable and liberal in Europe.

In my findings presented below, I have compared and contrasted the German housing system with that of the United Kingdom (UK), which is considered amongst the most unaffordable and supply-constrained markets in the world.

You will see that German and UK housing policies are polar opposites, with the former providing highly responsive housing supply, significant rental controls, and tighter credit regulations compared with the latter.

Before I kick-off, consider the following broad indicators relating to the German and UK housing markets.

First, real house price growth:

As you can see, German housing values have been stable but falling since the 1970s, whereas UK housing values have experienced four boom/bust cycles and deteriorating housing affordaility (indicative of unresponsive supply) since 1970.

Second, consider the rate of population growth in both countries:

After experiencing higher growth in the 1990s, Germany’s population has grown more slowly recently.

Finally, consider home ownership rates in the two countries:

Whereas Germany has one of the lowest home ownership rates in Europe (just over 40%), the UK has one of the highest (around 70%).

There are three main factors that seem to account for Germany’s stable and lower home prices and lower home ownership rate: (1) responsive housing supply; (2) secure rental tenancy; and (3) more regulated mortgage credit availability.

Housing supply:

Germany has some distinct features that enables it to provide a plentiful supply of housing in response to increasing demand.

First and foremost, the German constitution contains an explicit ‘righ-to-build’ clause. According to The Policy Exchange:

…this “means that everyone is entitled to a permission to build on his or her property as long as there is no explicit legal rule against it.

…if the proposed building fits into the plan, permission has to be granted and if the local authorities deny it then a court will enforce it…

Although there is very close control of what can be built on any site, provided it meets the requirements of the master plan, a developer just can get on and build new housing without seeking development permission.

Most importantly, the local governments that control the planning process have a direct financial incentive to provide land for housing, since they receive grants based on the number of inhabitants. Therefore, encouraging development is an important way for local politicians to increase their budgets.

Now compare the liberal German system to the centrally planned approach in the UK, which has for decades explicitly constrained the supply of land for development.

First, UK cities are surrounded by strict ‘greenbelts’ (similar to urban growth boundaries), which prevent development past a certain point. These greenbelts have significantly restricted the availability of land for development, helping to push up prices.

Second, and related to above, the overriding planning objective in the UK has been ‘urban containment and ‘densification’. There is now a target that 60% of all land for housing should be brownfield land – i.e. land which has already been developed for some other purpose – which necessarily means the restriction of land supply and higher land prices.

Third, any change from the status quo - such as a change in land use from rural to urban, housing to office, or an increase in housing size - requires planning permission.

Finally, the UK operates a centralised fiscal system, whereby local authorities – which are the primary decision makers on development and have statutory obligations to provide services for new houses – receive very little revenue from increased population and housing. As such, these local authorities tend to oppose development.

The divergence in home construction rates couldn’t be more stark, as recently summarised by Dr Oliver Marc Hartwich in Business Spectator:

Over the past forty years, both the UK and Germany experienced similar population growth, almost identical decreases in household sizes, and comparable economic growth. Besides, both countries have similar population densities.

Summing it up, the UK and Germany share all the factors that explain housing demand…

However, as comparable as they are with regard to housing demand, they are wildly different in terms of housing supply… The Germans built more houses than the British, both in per capita and absolute terms.

The EU collects data for the housing markets of its 27 member states. According to their statistics, Germany’s rate of dwellings completions per 1,000 inhabitants was consistently higher than the UK’s. In some years the difference was only 10 per cent, in others more than 110 per cent.

The differences in completions were also reflected in the land made available for development. The Cologne Institute for Economic Research calculated that last year there were 50 newly developed hectares of land per 100,000 population in Germany but only 15 hectares in the UK.

Rental system:

The German rental system is another key factor contributing to the stability and affordability of the housing market. While the majority of rental dwellings in Germany are private, rents are regulated and prices are prevented from increasing sharply. Tenants also have security of tenure as long as they pay the rent and behave well, except on the rare occassion when a member of the landlord’s family needs the accomodation or when the building is going to be replaced.

Further, because renting is the dominant housing choice in Germany, the political system is highly sensitive to tenants’ rights and perecived threats to the status quo typically receives prominant media attention and political responses.

Since home prices are relatively stable (owing to liberal supply) and renters enjoy secure tenure, Germans have little incentive to rush into owner occupation. As such, Germany doesn’t suffer from the ‘panic buying’ and speculation often present in bubble housing markets.

In comparison, the UK rental system could not be more different. According to the RICS European Housing Review:

The UK now has probably the most liberalised housing sector in Europe since the 1989 abolition for new tenancies of previous controls. There is only limited security of tenure for the first six months of a tenancy in the most common types of rental contract and rents are freely negotiable…

The typical rental property is a terraced house in an outer or inner suburb of a town or city. The property will rarely be new: only 13% are post-1985, and almost two-thirds are pre-1945, although most will have been recently modernised.

And because of the volatile nature of UK home prices (caused largely by supply constraints) and the lack of security of tenure in the rental market, ‘panic buying’ from first-time buyers and investor speculation is prevelent when house prices are rising, adding to price volatility:

House price expectations influence tenure choice. Periods when rising prices are expected encourage households to enter owner occupation and the opposite occurs when prices are expected to stagnate or fall. Demand cycles for owning and renting consequently tend to vary over time. Currently, more people are renting because of expectations of continuing falling prices as well as because of greater problems in finding mortgages and raising deposits.

Availability of credit:

Mortgage finance in Germany is also conservative relative to most economies that have experienced housing bubbles. According to RICS:

…credit availability is more strictly rationed in Germany compared with the pre-financial crisis experience in many other countries. For example, there is conservative loan appraisal, no sub-prime segment and thorough vetting of loan applicant details.

Moreover, base loan-to-value ratios (LVRs)  from mortgage banks (the main provider of home loans) are capped at 60%, although other unsecured loans are often added into loan packages (at higher interest rates), which tends to increase the overal LVRs.

In contrast, the UK mortgage market was fully deregulated in the early 1980s. During the height of the 2000s credit/housing bubble, UK lenders were offering 100% plus LVR(i.e. no deposit) mortgages to first-time buyers. However, since the onset of the global financial crisis, lenders have rationed credit and required higher deposits (reduced LVRs), thus contributing to the boom/bust cycle inherent in the UK housing market.

Conclusion:

The contrast between the German and UK housing markets couldn’t be more stark.

Unlike Germany, the UK housing market is essentially a bubble factory. Wheras Germany’s highly responsive supply ensures that extra demand manifests itself in rising new home construction rather than increased prices, the opposite is the case under the UK’s restrictive land-use policies.

The UK’s deregulated  rental market and lack of tenure has also ensured that renting is a second rate option, thereby encouraging residents to strive (and borrow big) for owner occupancy. And of course the UK’s lax financial system has been only too happy to oblige, providing households with no deposit mortgages during the boom followed by rationed credit during the bust.

When all these factors are combined, is there any wonder why Germany’s home prices have remained stable and affordable, and free of the speculative behaviour,  ‘panic buying’ , and price volatility inherent in the UK system?

It’s a shame that Australia has inadvertently adopted the worst aspects of the UK housing market, namely: the UK-style planning system, complete with similar vertical fiscal imbalances with respect to federal, state and local taxation revenues; a deregulated rental market offering insecure tenure; and a deregulated mortgage market that provides low deposit finance at generous multiples of income.

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69 Responses to “ “How Germany achieved stable & affordable housing”

  1. AnonNL says:

    And, may I add, the quality of houses in Germany is fantastic with strong buildingmaterials and proper insulation (higher intrinsic value, lower nominal value compared to some bubblemarkets)

    Also interesting is the fact that somehow the Germans have achieved a liberal market which hasn’t lead to clutter and ‘defacing’ of the countryside. (Although there are some notorious areas such as the urban-industrial Ruhrgebied).

    Great article Leigh.

  2. Anne says:

    One reason that the UK has restrictive supply is because the country is already highly populated and the existing infrastructure would be unable to cope with the extra people. House building on a large scale, especially on green fields, is very unpopular. Although Germany’s population density at around 230 per sq km is only slightly less than that of the UK at around 250 per sq km, this gives a misleading impression. 84% of the UK’s population live in England where the density is over 380 per sq km, and most of the pressure on housing is concentrated in the affluent south east of the country. There are plenty of empty houses in the UK – they are just in the parts where employment prospects are bad and nobody wants to live!

  3. Ben says:

    A lot of great articles on MB, but this is even better in terms of a fresh perspective.
    Finally I have a small bit of evidence for my long-held views as to why we should be building closer ties with Europe rather than eschewing them for Asia. Of course we should be doing both, but there are little pockets of progressiveness in Europe from which much can be learnt by an ostensibly western nation albeit the other side of the world. If only our politicians had the slightest clue.

    • Al says:

      I think our system is heading more in the direction the US operates. Stronger corporations, weaker government. I don’t think our government is strong enough to do anything about, for example, reforming banking and increasing deposit requirements to 20% (half of what was mentioned in the post is a requirement in Germany). Not to mention what happens when you try and tax the mining industry. We can’t even reduce number of poker machines in clubs let alone address bigger issues. In the US all Obama could do was reform their equivalent of medicare while I am sure there are bigger problems. I do like his speeches though. I think governments still hold their own in Europe.

      • TSpencer says:

        Id say we are getting more government in the Anglosphere (bureaucracy,public sector etc) but they are weaker in nature

      • Ken Masters says:

        If the government instates a 20% minimum deposit for house owners from now on, considering the current HIGH house prices, individuals/couples would need about $90,000-$100,000 cash up front.

        Now in today’s society and with current COLA set as where it is, this task is ALMOST impossible, unless the individual is earning in excess of 150K a year, in which this “fortunate” individual will only need to save up, base on “comfortable” living, 2-4 years.

        But the average Joe, average income of around 50-60K, its almost impossible to save the money to buy a house, hence will be limited to a “rent only” policy, unless the house prices stay close to what they are now in 15 years, in which “Joe” can finally have his $100,000 deposit.

  4. PETER W says:

    I have no pitty for German banks who lent out their (deposits) aka trade surplus to other Euro nations that did speculate on housing.

    Banks & Banksters are the least money savy people on the plant, second only to their shareholders and their governments (currently evolving history is the proof).

  5. Excellent. Thank you Leith.

    Dr Oliver Marc Hartwich also wrote an interesting article recently, comparing the cost of living in Germany with the situation in Australia. Someone may like to provide a hyperlink to that important article.

    I do hope the team at Macrobusiness consider researching and writing about how housing bubbles trigger general inflation and do encormous damage to peoples standard of living and a nations / states competitiveness.

    Without the housing bubble problems, places such as Germany and Texas, have enormous competitive advantages.

  6. richard b says:

    Always liked the Guardian anecdote:

    I shall never forget the story told by the late Lord Alexander of Weedon who, as chairman of NatWest, visited the Bundesbank when Karl Otto-Pöhl was its president. Alexander was carrying a copy of an English newspaper that displayed a headline to the effect: ‘Good news – another rise in house prices.’ Herr Pöhl commented: ‘Over here, that would be bad news.’

  7. SB says:

    Another factor is cultural.

    Australians are obsessed with housing, the housing “ladder” and house prices. As mentioned, Germans are generally quite happy to rent.

    An example is some German friends of ours. They told us how they had started thinking of buying a house, but they felt it was such an old person thing to do. They are almost 40 years old.

    I told them how in Australia if you haven’t scrounged for a deposit on your first house and bought it by age 25, you’re somehow considered economically irresponsible.

    Germany is probably the only country in the world that I’d consider buying real estate in, because it represents decent value for money, with the banks not having inflated the price of houses through the roof with excessive lending. One reason why they haven’t is mentioned above, but it also lacks this fervent demand from the populace to play “property ladder/debt mania”.

    • Ben says:

      It’s a bit chicken and egg. The system influences the culture and visa versa.

    • Matt in Auck says:

      one of Leith’s main points was that there is less incentive to buy as oposed to rent, because capital gains are minimal / non-existent, and tenancies are more secure
      the German system is far superior and a similar system should be adopted ASAP
      Its no coincidence that both Germany and Texas have more responsive planning systems AND lower LVR regulations AND have avoided housing bubbles

      • Thanks Matt. I had dinner recently with a Texan from Dallas. He is an avid reader of my blog and was out here scoping the Aussie housing market for shorting opportunities. He explained how most of the rental properties in Texas are by specialist companies and pension funds whom provide standardised service, competitive rents and stable tenancy (i.e. longer term rentals). Compare this approach with the bubble markets of Australia, NZ and the UK where the rental market consists predominantly of private landlords offering 12-month terms in often sub-standard premises.

        I also questioned whether Texas’ mortgage lending policies were more conservative/regulated than elsewhere in the USA. He said that credit is still very easy in Texas with 95% finance available (e.g. via the FHA). The big difference is that Texas limits home equity withdrawal (i.e. using the home as an ATM) and has mandatory cooling-off periods in place. So yes, Texas’ mortgage lending is more regulated, but credit is still relatively easy.

      • Matt in Auck says:

        thanks for clarifying Leith – great piece

  8. jesse says:

    Thanks for this, Leith. Large political influence of rentership, dispersed land use planning regime, and tight credit restrictions (and we shouldn’t forget relatively slow population growth) seem to allow Germans to focus on real economic output.

    We shouldn’t think that housing is necessarily cheap there, though, but at least there’s no blight of speculation.

    • WArenter says:

      Exactly – a stable housing market allows people to focus on real economic output.

      I’ve studied in Germany and seen how the lack of pressure on young people to own a house allows them to step out and start new businesses – new innovation that creates real economic value.

      I run my own business with my wife and all we hear about is how people would love to do what we are doing but they can’t because they have a mortgage. We have self funded our business but have had to move 5 times in 6 years of renting. Our investment is in our business but we still need somewhere to live.

      • grant says:

        Strikingly important point.
        In Aus, the govt has defaulted to the wishes of RE lobby/banks/MSM and corralled buyers into debt servitude using fear/greed as a motivating factor.
        In Germany, released from such a constraint, the spirit of business start-up has room to expand. Intelligence needs space to grow and will not thrive in a parasitic culture. Aus policy makers have got it all backward.

    • Josh A says:

      Please show me evidence of the dispersed land-use planning regime in Germany?

      German densities are actually very high, and the layout of cities are more polycentric then sprawling.

      The problem in Australia is distribution and speculation not planning policy.

  9. JJ says:

    I think deregulation has gotten a bad name…

    “In contrast, the UK mortgage market was fully deregulated in the early 1980s. During the height of the 2000s credit/housing bubble, UK lenders were offering 100% plus LVR(i.e. no deposit) mortgages to first-time buyers. However, since the onset of the global financial crisis, lenders have rationed credit and required higher deposits (reduced LVRs), thus contributing to the boom/bust cycle inherent in the UK housing market.”

    Dereulation has to been seen context of banking regulations and securisation as well.

    I think deregulation combined with a perceived ‘era of moderation’ by central banks (the link between reserve requirements and loans generated was broken) has done more damage than deregulation alone.

    I have often wondered if there was no ARPA (govt regulations pretending to protect the system), if such problems would have occurred. Certainly an implicit guarantee (i.e. we’ll bailout which is essentially protecting bond-holders) from the Govt (yet another Govt distortion) hasn’t helped. These measures allowed banks to take risks because losses would belong to taxpayers and profits to shareholders while bond holders are protected = nice deal.

  10. Lefty says:

    “credit availability is more strictly rationed in Germany compared with the pre-financial crisis experience in many other countries. For example, there is conservative loan appraisal, no sub-prime segment and thorough vetting of loan applicant details.”

    This is the clincher in my veiw – no matter how restrictive land use policies may or may not be, prices simply cannot run away if loose credit is not available for housing. With Germany it could be a cultural thing as well – Germans are traditionally debt-averse.

    There seem to be new developments being released all around me here – yet relatives in the real estate sector tell me that new land is being snapped up immediately as it is released, often bought site unseen. Speculators are having a party. And why? Because no matter how fast land can be physically released, it’s always possible to buy it up faster if easy credit is available and the incentives to do so are present.

    • Again I will have to disagree with you here Lefty. Take a look at the UK house price chart. You will notice that it experienced two bubbles/busts in the 1970s, which was prior to financial deregulation and the era of easier credit and was also when rental controls were in place. Easy credit just makes boom/bust cycles arising from restricted supply much worse (more ‘fuel on the fire’). That’s why both a loosening of supply constraints and tighter mortgage lending are required in order to prevent housing bubbles.

      • Lefty says:

        I see what you’re saying there Leith but by what parameters do we judge something to be a bubble? Or distinguish a relatively minor cost surge (and subsequent fall back again) from a truly serious asset bubble and bust?

        It’s certainly true that the UK has been more volitile over that time and I’m not arguing that the supply-side contraints you mention were not a factor in this – but it looks obvious that the pre-deregulation era prices run ups and falls are relatively minor in comparison to the post-deregulation bubble.

        Ergo, prices may be more volitile in an environment where supply-side constraints exist but at the end of the day, I think logic dictates that prices cannot rise beyond what lenders are allowed to lend by prudential regulations. I would like to see tighter lending rules in place but acknowledge that with so many vested interests (including governments with their fingers in the pie) this probably isn’t going to happen – unless it crashes in a major way. Then everyone will demand to know why more prudent lending standards were not enforced to prevent such a catastrophe.

      • Lefty says:

        I do appreciate though that you are not merely aguing that it’s all the fault of supply-side constraints but are acknowledging the role of loose credit as well.

  11. gtempo says:

    I’m writing to my MP to read this article. Please spread the word about this so we (Australias) get educated on models/policies that work and those that don’t.

  12. The Lorax says:

    And yet cities in Germany couldn’t be more different to cities in Texas in terms of population density, public transport etc.

    I don’t think this can be explained by urban growth boundaries or the lack thereof.

    Can you explain this Leith?

    • Australia should learn from both the German and Texan models, Lorax and take the best bits from each. One things for sure, Texas’ model is far better than anything in Australia or elsewhere in the US. It is incredible that it has been able to maintain stable and affordable housing in the face of easy credit, sub-prime lending and rampant population growth… And its economy is amongst the strongest in the US. These are attributes that the bubble factories of the West Coast of the USA have been unable to replicate.

      Whether Germany’s planning system would have coped as well as Texas’ in the face of easy credit and high population growth is also debatable.

      That said, if I could choose an overall economic system to replicate, I would choose Germany’s hands down; mostly because I am opposed to ponzi-population growth.

      • The Lorax says:

        FWIW, I would prefer a housing bubble-bust to Texas-style suburban sprawl.

        IMO, Texas has bought into the ultimate bubble: Rapidly growing populations in the face of limits-to-growth (both resources and environmental)

        “Suburbia is the greatest misallocation of resources in the history of the world”
        – James Howard Kunstler

      • California’s sprawl is just as bad. L.A. and San Fran’s growth boundaries, for example, have pushed people into far flung towns (e.g. San Bernardino and Stockton), thereby increasing their commute times and fuel use. The same has happened in other regions with artificial growth constraints.

        In Victoria, some of the largest growth areas are exurban settlements well beyond Melbourne’s UGB, such as Baccuss Marsh, Wallan, Drouin, Gisborne and Warrigul. So contrary to preventing sprawl, growth constraints often increase it as people move further afield in order to obtain lower cost housing.

      • Matt in Auck says:

        if you’ve been to Houston you will know that plenty of quality intensification has been occuring as well – that’s because some people want to live in handy compact communities.
        But it doesn’t shove that option down people’s throats, but lets it happen organically if there is demand for it – as there is.
        Big problem here in NZ is many of our urban planners / designers are pommie immigrants and have brought with them their country’s flawed world planning view. They all want us to live in quaint little terrace houses, in a very Victorian view of the world (and more often than not they live themselves in a big house on the edge of the city)
        Time to import some German Planners

      • Spot on Matt. Houston’s employment is decentralised with only 7% of people employed in the CBD. Many people live close to work, which is probably why Houston’s average commute time is below the centrally planned markets of the West Coast. The Woodlands north of Houston is the best example of one of these decentralised communities where people live close to work.

      • TSpencer says:

        and credit being used for asset speculation as opposed to entrepreneurship, production and growth in real GDP isnt a misallocation of resources?

      • Matt in Auck says:

        right on Leith. Most modern western cities are polycentric, which means people living on the edge of the city don’t all face massive commutes into one single CBD. In fact I know a few people in Auckland who live in apartments in the CBD and commute out towards jobs in the periphery!
        This complex reality differs hugely from the simplistic, dogmatic mantra of centralist planners who somehow seem to think everyone who lives in outer suburbs all drive one hour into CBD employment.

      • I tend to favour the Texas model Leith, as they, like us are part of what we very loosely refer to as the “New World”.

        It would be a terrible day indeed if we ever attempted to control population growth. Far better as I see it, to get the governance / regulatory stystems sorted out to cope with it.

        People are our greatest resource. Rember Julian Simon?

        And heres a much older guy suggesting this to a young guy!!!

  13. mav says:

    I hope the taxpayer funded National Housing Supply Council does similar research and make recommendations to the government, instead of providing just the “under-supply” fodder to the bubble denying RE spruikers.
    .
    Saul Eslake, are you listening? :)

  14. The Prince says:

    Thankyou Leith – I’ve been waiting for this one!

    A few commenters have already touched on some ideas and areas of discussions, so I won’t repeat.

    The main one to me is still cultural – the Germanic peoples are different to the Anglo-speaking cultures (e.g England, Canada, Australia), and its all about a different work ethic, and a different role for government.

    Germans and the Swiss love government and regulations, just as much as the Anglos’,- but only decentralised, not the multiple cake layer versions we seem to have adopted and corrupted.

    The competition between States and cantons in Germany and Switzerland is one of the key reasons for their success, along with their brilliant work ethic and the way they foster innovation, instead of speculation.

    There is a lot to learn here, but I feel turning around cultural attitudes (e.g look at the shameful attitude we have to asylum seekers) will be almost impossible compared to the relatively simple solution of re-regulating supply and demand failures.

    Thanks again Leith.

    • Mav says:

      Never let a crisis go to waste. Americans are now rethinking on their Great American Dream of borrowing and acquiring a home.
      .
      Attitudes can be changed.

  15. Ronin8317 says:

    “Demography is destiny”. You must also take into account the population growth. Germany’s population growth was at 0.8% in 1990s, and then downhill until it hit 0.3% today. UK in contrast has been trending up from 1982. This by itself cannot cause the housing bubble, but when population growth and restrictive land policy intersects you create the perfect environment for a housing bubble.

    • The Prince says:

      I look to Germany’s low population growth, whilst having no property bubble, a stable country and great economic prosperity and innovation as a sign of what can be done, vs. the “we must grow exponentially or we will die” brigade.

      However, one factor for Germany is the cheap Euro – its trading at a very large discount to the old Mark. So like China, they have been advantaged with a cheaper than normal currency, which has helped their export sector.

      And of course, their banks have been as speculative as any other – just not inside their borders….

  16. Lighter Fluid says:

    Good post Leith.

    For a look at the ‘demand’ side, ie, growth in mortgage lending, see the comparison between Germany and Spain about half-way down the page here:
    http://www.creditwritedowns.com/2011/05/is-there-a-eurozone-credit-cycle.html

    eg: Germany –
    http://2.bp.blogspot.com/-Wuzkun6Necg/Tcav8dKcR8I/AAAAAAAAR9k/4mtMSg49qCs/s1600/German%2BTotal%2BMortgage%2BLending%2BY-o-Y.png

    vs Spain:
    http://2.bp.blogspot.com/-X2uzUILoyo0/Tcas5T7kgWI/AAAAAAAAR9M/DdQsPVVasjo/s1600/Spain%2Bbank%2Blending%2Bfor%2Bhouse%2Bpurchases%2BY-o-Y.png

    A Keenian analysis would suggest that a) the credit impulse plays very little role in Germany, and b) That Spain is effed.

    I also find it interesting that real estate investment in Germany is more the domain of institutions than individuals. They keep prices rational (ie- linked to rental yield), and are there for the annuity like income rather than the capital gains.

    To my mind, there were a confluence of attitudes, policies and circumstances that prevented the turn-of-the-millennium housing credit boom in Germany (unlike just about every other developed nation in the world).

    Could it be that Germany represents one of the last bastions of honest capitalism – as opposed to the kleptocratic ponzinomics we see everywhere else?

  17. Mic says:

    Very interesting post Leith.

    I sent this post to a mate of mine who has a German wife (and German mother in-law living in the converted attic above them) and with his permission have reproduced his comments.

    ———–

    There is also a social component.
    German families were ‘educated’ in the immediate aftermath of WW2 to share. My wifes family – mum, dad, sister & brother – lived in a one bedroom apartment that had shared bathroom & laundry. Take it or leave it.

    Today in many parts of Germany, you have extended families living under the one roof. In the case of my wifes aunt, there are four generations under one roof. Does interesting things to credit assessment when you have 3 or 4 income streams.

    I find it amazing that Germans are incredibly house proud but don’t care to own. Those that own do it more for stability of family rather than as an asset.

    It is interesting, though, to see that the concept of ‘lebesraum’ is, albeit somewhat toned down, guaranteed in the constitution.

    The other social aspect to consider is environmental protection. Germans take it for granted that they are required to not pollute. Authorities assume that builders will do “the right thing” as opposed to UK/Rest of the World that assume builder will pollute

  18. Pfh007 says:

    Yes, excellent article. Keep up the good work.

    Eventually the received nonesense re housing policy will be questioned by more people in the wider community.

    I have started to notice more and more comments on MSM websites raising some of these issues.

    Good policy will prevail some day – hopefully soon

  19. Great article Leith.

    I think you have pulled the comparison together nicely.

    Of course, you are probably expecting my comments on the supply side – so here they are :-)

    I’m not sure how familiar you are with various Australian planning systems. For example, in Brisbane the planning code has a self assessable level of application. Meaning that you have a right to build within the bounds of that code without an approval. This sounds very similar to German rules.

    While Councils don’t get grants in proportion to their population, councils here do receive most of their revenue from rates, which go up not with population, but with the number of dwellings. So it seems that councils do have some incentive to approve new dwellings.

    For mine, the more mature rental rules and credit rationing are key. There is also a cultural side to consider – Germans are typically financially conservative and very wary of ‘too good to be true’ speculation.

    • Thanks Cameron. But SEQ does have an urban growth boundary in place does it not? Also, its zones are fairly prescriptive – i.e. rural, commercial and residential – and it is debateable whether enough land has been zoned residential to facilitate competition between developers/land owners in order to keep land prices down (and prevent land banking).

    • pete says:

      Council rates are based on unimproved land value rather than number of dwellings, and they base their unimproved land value on market house prices.

      There is therefore an incentive to make house prices as expensive as possible, which means greater restrictions on dwelling development would help councils in raising money.

      I think the rental rules are the lesser contributor to the German pricing stability, though i do take your point that they must contribute. If you have little developmental restriction and credit isnt being thrown at people in an “equity mate” fashion, rental rates will naturally stay lower. If rents started to increase substantially it would lead to responses in housing supply through extra building, which would then place downward pressure on rents again.

      I would think that the market mechanism for rents is enough if the bigger issues are taken care of. If you have relatively stable rents landlords will automatically look at having longer-term tenancies to ensure that their property remains tenanted. Its when you have rapidly increasing rents (due to increasing prices and supply constraints) that you have short-term tenancies.

      Is there any data available on German rental yields? I’d like to know whether rental price restrictions genuinely are restrictive.

      A good start IMO would still be to slap the councils into easing development rules and see where that takes prices. I’d expect to see a lot of new housing development if the rules werent so stupidly restrictive.

  20. Adrian says:

    All good stuff here. A few other things I noted when living in the UK up until last year was a lot of Brits also brought properties in France, Portugal, and Spain (other places as well), but these were the main ones), and like has been stated, largely due to loose credit.

    One other thing we saw was during 2008 many of the Polish in our village sold up and went home, and from the info I read this was true in other parts of the UK; that did free up a lot of housing.

    Additionally, as the UK is a welfare state there is a huge desire to move there, and we saw pressure on services in our village on that front, and that does add a demand factor for housing as much of it is state provided.

    From our UK friends that brought in Spain, they said the other major owners of apartments and homes were the Germans. I don’t know if that was the case in Portugal etc. But maybe Germans rented at home, and brought elsewhere for the summer, and retirement in the sun?

    Regarding Germany they has a large focus on science, engineering, and manufacturing that we don’t have here to our shame. Also the quality of their education is excellent. I worked with a lot of German engineers over 13 years and they were top class, and as has been stated their work ethic is excellent.

  21. Black_Dragon says:

    Niced piece of research here.

  22. Jono says:

    I wouldn’t give any credit to German rental controls. They are another form of central planning and as shown in New York, they cause all kinds of hazards.

    For example, rental property owners spend almost nothing maintaining their apartments and many are in a state of decay. The return they receive on the property is extremely low and they know there is an artificial shortage of rental properties so tenants will take what they can get.

    Otherwise, Germany’s system is very sensible. Local authorities should have absolutely no say on what can or cannot be built. The title owner should exercise complete control.

  23. Dwaine says:

    Great article;

    I have to say that I used this (and many gems from previous articles) to try and sum up the market in a shot space. I wrote it for another post http://www.smartcompany.com.au/property-investor/20110615-is-the-australian-property-market-headed-for-a-major-correction.html

    But I thought I’d reproduce it here.
    ————————————

    Debt is present consumption at the expense of future consumption. If decreased lending standards, lower interest rates and an a mass obsession to invest in housing to get out of insecure rental agreements, from the fear of being priced out forever, baby boomers pressuring their kids as it worked very well for them, or the FHBG bringing FHB’s into the market sooner than they otherwise would have lead to a build up of debt, future demand is condensed into the present. This causes people to overestimate future demand (extrapolated out from present demand) and oversupply. During the build up there is an undersupply, afterwards there is an oversupply. Planning policies play a role, as the more restricted they are the less supply can move, and the more prices move instead. If they are lax then supply moves more, leaving prices more stable.

    Both the US and Australia had similar increases in debt levels, with more conservative lending standards in Australia.

    If the US’s problem is excessive supply, and Australia does not have excessive supply, it suggests prices did more of the heavy lifting for us.

  24. 1eyedj says:

    An Irish friend of mine living in German recently posted this article along with the catchline “They’re talking of a property boom already happening in Germany. Why do these things seem to follow me?”

    Most of the article is on inflation and how the ECB rates are inappropriate for Germany. There is a section on how apartment prices are rocketing in some of the capital cities. It will be interesting to see if the supply stabilizers will be deployed.

    http://www.spiegel.de/international/business/0,1518,760105,00.html

  25. vlade says:

    Thanks Leith, great post. It would be made even better by doind a follow-up, looking at the consequences of the systems. For example, sinking capital into (ultimately) unproductive housing vs. employing it a bit more productively… I also suspect it forces more infra investment (i.e. compare transport/utlities infa investment in Germany and the UK – it would be interesting comparing Texas, but of that I know little :) ).

  26. SvetlanaBabe says:

    Having lived in the PRC, Singapore and Japan (and Australia) local houses are of very poor quality.
    I’ve been to a few McMansions and they cost a fortune to keep warm in winter and cool in summer (unless one spends a fortune on energy derived from fossil fuels).
    What is of greater concern is they are already falling apart after a few years of normal habitation.
    Awful quality at exhorbitant prices.
    It doesn’t take much to satisfy the locals.

  27. db says:

    I rented a house in Germany for 2 years: incredibly good value, in a very popular suburb in a cosmopolitan city. Totally irrelevant to this post, but I do remember those times fondly. It was so cheap and easy to live well.

  28. Stellaa says:

    Your basic idea of German zoning/building laws is wrong. Building is highly regulated on the national and state level. Green belts are protected .

    • Stella. I suggest that you read the Policy Exchange article linked in the post. It was co-authored by Dr Oliver Marc Hartwich, a well respected economist and planning expert from Germany. He does not support your view of the German housing market. Nor does Professor Paul Cheshire – another planning expert from the London School of Economics.

      • radzimir says:

        Sorry, but Stellaa is right.

        The so called constitution may state whatever anyone wish, but real live is controlled by lower level low, in this case “building low” (Baugesetzbuch, short BauGB).

        There is strict planning in Germany and nobody has right to develop any buildings on its own land without permission from local government.

        The local governments have the (limited) right to develop land and financial and political motivation to provide land, but only at expensive prices to profit from gains. It is some sort of financing source.

        There is definitive scarcity of land at affordable prices. Agrarian land near big cities is bought by government for 20€, infrastructure development cost from 30 up to 80€, but it is sold for from 300 up to 700€. Near bis cities, land cost the same as building structure, and there is definitively no shortage of space what could be developed. Providing enough affordable land for housing is clearly not the strategy.

        German banking was always behind the curve, so there are no 100% loans with no down payments – that was the main cause preventing the bubble.

        Please notice, that low home ownership means also, that there is big and powerful landlords-group. They live from cash-flow, not appreciation. They are against bubbles because they have no gain from it and it would encourage renters for buying eroding their client base.

        So, no one wants real estate bubble in Germany. That’s why it’s not there. But it doesn’t mean, that housing is affordable and our falling earnings doesn’t make it better.

        But I clearly admit, countries like UK, Canada, Australia, China, India are the living hell. It will end badly.

    • There is a difference between set rules and official discretions. As long as people have choices between different sets of rules and the regulating governments do not have a fiscal incentive to drive up prices, how restrictive rules are does not matter so much. Official discretions not only set up an incentive for corruption, they are open to (and will be) politically “gamed”.

  29. demografix says:

    Great article.
    I think you missed out the taxation issues surrounding capital gains tax in Germany. The legacy of these laws dates back to the socialist ideals that Hitler pushed and last until today.

  30. Great post. The constitutionalised antipathy to official discretions was to a significant degree a response to their abuse by the Nazi regime.

  31. Josh A says:

    Read this!

    From:

    http://www.earthsharing.org.au/2011/05/17/speculative-vacancies-distort-supply-demand/

    Australia’s endless debate about property prices pivots on the balance of supply and demand.

    Earthsharing’s Speculative Vacancies in Melbourne 2010 Report demonstrates that nearly five percent of all houses in Melbourne are simply empty and unused.

    The report identifies and measures the scale and extent of speculative vacancies – properties held out of use in the pursuit of capital gains – using water meter data collated by the various utilities.

    “The REIV consistently points to it’s Rental Vacancy rate of 1.7 per cent as the sole measure of vacancies in Melbourne,” Earthsharing Research Director Karl Fitzgerald said today at the release of the report. “Our survey shows one in twenty houses and apartments are just sitting there vacant.

    “Recent increases in house prices have been driven by speculation, not a housing shortage. Property owners are restricting the supply of housing by holding properties off the rental market.

    “We estimate the Speculative Vacancy Rate for Melbourne in 2011 to be 4.94 per cent or 46,220 of 935,305 properties surveyed.

    “More than 20 suburbs surveyed had estimated vacancy rates in excess of 8 per cent. There are notable hot spots in Docklands, Williams Landing, East Melbourne and Truganina,” Fitzgerald said.

    “Supply and demand in these suburbs is significantly mismatched and should be monitored carefully for distress as housing prices recede.

    “Docklands (23.3 per cent vacant) is particularly interesting as builders there have been obliged for some years by their financiers to offset risk by pre-selling a very substantial proportion of apartment before commencing construction. The vacancies there are largely owned by individuals, many of whom paid a very small deposit and signed a water-tight contract obliging them to pay the remainder on completion. These contracts are coming due just as the price trend turns down decisively,” Fitzgerald concluded.

  32. Diogenes the Cynic says:

    Great article and the comments discussion provides almost a total snapshot of what is going on in Germany.

    What are the German rules on capital gains taxes and are negative gearing deductions allowed there? I am guessing no. These are definitely factors in our recent bubble – the halving of the capital gains tax by Howard in 2001? was one of those marginal cost/benefit factors that influenced new landlords.

    So it looks as though we need changes in urban growth planning, building regulations, hard caps on mortgage lending LVRs, changes to taxation policy, stronger tenancy rules (although from experience my tenants seemed to have reasonable powers at their disposal), removal of silly FHB grants anything else?

  33. nodgene says:

    I found your article by chance, after doing preliminary investigation into the differences in house prices in the developed world. It’s good, but I can’t help but think that the central flaw is that you’re missing the forest for the trees.

    The biggest factor is population density, everything else influences this one way or another but none (even population growth) overwrite it.

    On face value population density is usually misleading. Britain’s population density is a fairly reasonable 255/km(squared). But as has been mentioned in the comments, the majority of Britain’s population exists in England, not the Scottish or Welsh highlands or Northern Ireland. Consequently England’s population density is a hefty 407/km. By comparison the next most heavily populated major nation in Europe is the Netherlands at about 405/km.

    Germany however has a healthier density of 229/km. The USA and Australia come in at ridiculous 34/km, and 2.8/km respectively.

    But that on face value is again deceptive. Much of America is effectively uninhabited, which needs removed from the calculation. Even if you disqualified half of America the population density would only average out at double the aforementioned, and one might as well conservatively eliminate 80% of Australia along similar grounds. The US state of California has a population density of 93/km, which no doubt would be increased when national parks and such are taken into account, but certainly it wouldn’t perk the figures remarkably.

    Your analysis needs to compare like for like based on population density first and foremost. To say Britain has unaffordable housing because of economic/planning policy is almost unintelligible when the comparison is with Germany, much less the USA or Australia. Britain has unaffordable housing because England is densely populated. The only thing that will produce a significant effect on housing prices is if over half the population disappear tomorrow, and the borders are almost closed to immigrants.

    The other two major factors which influence this restriction on green belt construction are the size of primarily agricultural, and secondarily forested lands. Nations need to assure their own food security, and so the question then becomes how much (if any) agricultural land can be handed over to property developers? Is the nation’s staple food production self-sufficient? And then, just how much chopping down of forests would the public tolerate? Not to mention that in mountainous regions such practices are risky ecologically, and likely to cause flash flooding. 30% of Germany and the USA is forest, but only 11% of Britain.

    Furthermore, local median (not average, unless inequality indexes are used) earnings need to be taken into account. As this will again push up the cost of rent and mortgages.

    So to conclude, I found your article interesting and thought provoking, but lacking in many fundamental concerns which need to be taken into account to properly compare the causes of high housing prices.